The book Money for Kids is a good guide to teach your young child about saving and how to make good use of money. This article talks about teaching your teenagers on how to save and spend wisely. Thus far, you provided your children with all their needs, such as home, food, clothing, education, etc. You also gave some allowance to teach them how savings can provide their wants. As a teenager, in addition to, or in lieu of an allowance, your teenagers might have earned extra money from short term sidelines or, for some lucky ones, even part-time jobs. They also had so many more opportunities to spend. While you were probably still providing their needs such as home, food, basic clothing, and education, etc. perhaps, they were already responsible for their special clothing and other wants.
From the time your teenagers go to College or University and as they actually start working “officially”, more often than not, they are not really financially literate. I have received many letters from college students and “yuppies” who are so excited with all the money they receive but don’t really know how to save. Their mind set is “earn so they can spend for their wants”.
Parents can really help them a lot, if they were not able to start at a younger age. Under your guidance and assistance, parents can now have them read this article and learn for themselves as I address them directly.
On the other hand, there are quite a number of young adults today who are already financially literate. I congratulate you if you are one of those who know how to regularly put aside a portion of what you earn and do more with what you keep. I can see your success in being financially independent if you have the determination and the discipline not to touch the money that you have saved and allow the interest on it to compound.
For those of you who are not yet financially literate or, for some reason, not readily conscious or aware of their personal financial obligations, I’d like to help you start saving and give you a few pointers on the basics.
Lesson One: PURPOSES OF A BANK ACCOUNT
You probably already have a savings account. However, you may want to look at your bank account from a different perspective.
– Transfer or open a new account in a bank that you can easily access during the bank’s operating hours. In this way, you will have more time to understand first-hand how your accounts operate and you have more time to interact with the bank employees.
– Choose a bank where you can establish a relationship with the bank branch officer who can show you higher income earning instruments as your savings grow. Let me warn you however, that in some cases, banks are not interested to encourage their depositors to remove their money from their savings accounts. The banks will earn more if you keep your money in savings accounts because of the low interest rates.
– Make sure that they know you and your contact information with them are updated so that they will readily inform you of any problem in your account. This is especially true if you will make check deposits or if you have a checking account of your own.
– Eventually, your bank can also help you establish your credit history and reputation.
– Understand the different accounts available in your bank and choose one with no minimum or low minimum balance required.
– If you need to have a checking account because of big payments you personally have to make (especially for those who will live far from their parents), discuss this with your parents, as there will be relatively large minimum balances required. They may choose to open an “and/or” account or even choose a combined savings account and checking account. This will reduce transaction fees such as automated teller machine (ATM) fees that are now charged by some banks after a certain number of withdrawals per month.
– If you open a checking account, you must keep accurate records, especially of ATM or debit (use of your ATM card in some stores like supermarkets to directly pay for your purchases) card usage. You must learn to balance your checkbook on a monthly basis. Keep track of all your deposits and check payments. When you receive your bank statement, compare your records with each item in the bank statement. Make sure your checkbook balance is the same as your bank statement after adjusting for the checks that may not yet have cleared.
– If you don’t have an account at all, make sure you open at least, a savings account too, especially if you have a full-time job or if you are still in college, a part-time job during the school year or summer.
Lesson Two: IT IS TIME TO LEARN TO DO REAL BUDGETTING
If your parents taught you how to budget your allowance or money from part-time jobs at an earlier age, you are very lucky. You already know that you should save part of your income before you even start spending. Income less Savings = Expenses Even if you are still starting College, you must remember that, some day, you may want to buy your own motorbike or car or even your own home. This is especially true, if you are already working.
But in College or when you work, you have to be responsible for more expenses especially if you stay away from home. This is now the “real world” that you are moving into. Even if you continue to live with your parents, go out of your way to understand your house budget to be better prepared.
To prepare a budget using a simple Cash Flow model:
– Prepare a worksheet with the Time Period for each column on the top row of the second column. The Time Period may be on the basis of weeks, months, quarters, or semesters depending on when you will be receiving the cash.
– On the first column, place all the income you will be receiving like allowances, part-time jobs or even a scholarship grants, if you are so blessed. Write the amounts you will receive on your Time Period columns opposite the income description.
Important discussions with your parents to learn from their experience:
– Understand the difference between your needs and wants. For example, going to the supermarket to buy ingredients for your meals is a need and eating junk food or eating out is a want. In buying the ingredients, choosing the least cost for value is a need and choosing expensive ingredients just to try it out, especially if there is no value added, is a want. It is important that you have enough to cover your needs first.
– Learn how to buy the right ingredients and the best value for money on the supermarket shelves. You will be surprised if you bring a calculator when you got shopping how much you can save if you understand the value per weight or volume of each product. Compare and understand that most items are cheaper in the supermarket compared to the wet market or the grocery.
– For those who will receive allowances, agree on the responsibility for expenses. For example, will clothes be part of your allowance or will you need to take a part-time job for that. If you will be away from home, who will shoulder the cost of returning home to visit.
– Keep track of your expenses by keeping a notebook. At the end of each day, learn to enter each of your expenses and compare to your budget. If you spent more than your budget on one item, you will have to spend less on another so that you do not run out of cash.
– You are only young once. While it is important to study, it is also good to have friends and some entertainment. Decide on how much that should be depending on what you can both afford and stick to that budget.
– Plan for big expenses and set aside money for those. For example, if you want to have an outing with your friends, make sure you are putting aside money for that on a regular basis.
– Remember that you need to be careful about when your money will be coming in. Your have to program your expenses so that you do not end up eating bread and water in the last week of the month because you ate out during the first three weeks and spent too much.
– Be sure that you keep an open line of communication with your parents. At the first sign of financial trouble, you must immediately go to them. So many get into deep trouble because they were scared to admit their mistake immediately. Of course, you can only be allowed a few mistakes and you will have to learn your lessons.
– Budgets are not carved in stone. They should be flexible but you must remember that, at any time, you cannot spend more than what you receive. Again, I repeat that you must set aside at least 10-20% of your income to save before you even start spending.
– For those who are working or will work, it would also be a good time to discuss taxes with your parents. Many do not understand the need to pay taxes. Most companies withhold income from salaries so you have to understand how much your net take-home pay will be. Your company may not withhold taxes but may declare your income. If your income will be declared, it is important that you learn to prepare your Income Tax Return (ITR). The instructions are behind the actual ITR form and it is good to understand that as you start working. So many are surprised when they receive the form from their company and realize that they need to pay more taxes than what was withheld. Unfortunately, more often than not, they have spent the money thinking that it was all for them to spend.
Lesson Three: YOUR OWN CREDIT CARD
If you are 18 years old or above, credit card companies will probably start offering you your own credit care. Generally, they will still ask for a co-signatory and sometimes, you will be tempted to get someone other than your parents. I hope you understand that you must ensure that you pay your card statement on time and should you be unable to pay, your co-signatory will be held responsible. It is good to have a credit card for emergencies and to lessen the cash you need to bring with you. It will also start you off in establishing your credit rating. Remember that this is a “double edged sword”. Your credit card can give you a good credit rating or a bad credit rating depending on how you use it. You will need a good credit rating when the time comes when you need credit to acquire long term assets such as a car, house or appliances.
Make your own rules to keep your discipline in your credit card usage.
1. Decide in advance what the credit card is to be used for, e.g. emergencies, groceries, etc.
2. Request for a low credit card limit from the credit card company to prevent serious problems with credit card debt.
3. Review the credit card agreement to understand fully how much time you have to pay before incurring interest. Pay your statement on time.
4. Keep all your credit card receipts each time you use your card. Ensure that you check each charge on your statement before you pay for your bill.
5. Credit card companies can make mistakes in their billing so you must ensure that you inform them of mistakes immediately.
6. Make sure that you go through pages 51-59 of my book “Making Your Money Work. Pera Mo, Palaguin Mo 2!” to show what will happen if a bill is not paid and the hidden costs of using credit.
Lesson Four: WITH PhP5,000 YOU CAN START BEING A PASSIVE ENTREPRENEUR
There are exceptional returns available from Mutual Funds (MF) with a minimum investment of PhP5,000. Mutual Funds are now closely regulated by the Philippine government through Securities and Exchange Commission (SEC). Some reputable banks (regulated by the Bangko Sentral ng Pilipinas) also accept this minimum invesment through the Unit Investment Trust Funds (UITF)
Both MF and UITF are vehicles to put together the money of many individuals into funds that are properly managed by professional managers. Each MF and UITF have its own investment programs and policies. It is best to talk to them individually.
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